ipo listings: Should you buy at the time of listing? Raamdeo Agrawal answers

Anything within the recent listings or anything in the upcoming listings of 2021 that you are particularly looking out for?
The good thing is all the new issues are from very high quality companies. But there is so much liquidity in the system that somehow these companies are getting completely mispriced at the time of listing. In the application itself, you do not get any allocation and when you go to buy in the market, the promoters offload at a high price and on top of it, there is a 40-50% premium at the time of listing. So they get completely outpriced. It would be better to buy some of the old companies in a sector which might be available at half the valuation of the listing prices of some of these companies.

We have seen some wonderful companies getting listed. But does it make sense to buy into them at the time of listing? You have to be very careful. There are opportunities even at times of listing because these are new companies and new stories. They are not very large in size. They might be a littler larger midcap companies at Rs 10,000-15,000 crore market cap. They have a lot of growth momentum left and are new to the stock market. So the story is not well known and there are good opportunities in these companies. But one has to be extremely careful at what price one gets into the stock.

A lot has been spoken about digitisation of the economy, transferring to tech and pivoting business models completely. Is there anything within the Indian listed space that you would look at to drive this theme forward?
We are going to see a lot of these unicorns. Some of the very promising ones are going to come in with IPOs. India has missed out on digital companies but now is our turn and in the next three-four-five years, we are going to see a lot of these digital companies coming in for IPOs and listing. We will have our share of e-commerce companies in the listing. In the process, we will also get completely non-profitable companies at some fancy prices. So one has to be careful. My competence to judge these companies is low because they are not typically profit-making companies. There are a lot of promises on various other fields but profits. So one has to understand the outlook for these companies, going deep into the future. Digital investing will start here and one has to look forward to it. We will also participate but it depends on company to company.

Coming to Warren Buffett’s latest commentary that came in on the sidelines of the Berkshire AGM, people were more intrigued about what was not said as opposed to what was said. There was no mention about the rebound in the markets, no mention about niche categories like SPAC. He very categorically said bond markets and fixed income is not going to give us returns. What has been your takeaway?
Buffett has been vocal about stocks being superior to bonds and he has missed no words in terms of saying that bonds are a very bad asset class right now because of the high interest rates. Apart from the yield, it also takes care of business risks associated with lending. Clearly the bond is a completely return-less risk kind of a situation. He was also very clear that equities are going to do better in this situation than the bonds.

This particular letter is one of the shortest letters — 14 pages against 23-24 pages and actually there is not much except for talking about his own investment buckets and the companies. This time what I am getting to hear from the letter is the power of repurchase, buyback by the companies and he himself has bought back about $25 billion of stocks of Berkshire Hathaway last year.

He has also gone overboard in talking about the power of buyback in Apple Computers. Basically he has been lauding the buyback by the companies he owns.

Another thing which he has actually repeated and finally has ended up saying is what is the kind of companies he is looking for — what works for him and what one should look for in the companies and that I thought is the best summary of what the guru Warren Buffett has said. He says the best results occur at companies that require minimal assets to conduct high margin businesses and offer goods or services that will expand their sales volume with only minor needs for additional capital. That seems to be the core of this particular letter and he says that he wants a few of them like See’s Candies but it is very difficult to find these kind of companies.

So, it is an asset light model with less asset intensity for future growth. He has talked about quality and growth and the margin of safety is integral part of the industry. But this letter per se does not talk much about anything else.

If you were to draw that same analogy to Indian stocks very few actually fit the bill — asset light, high margin businesses with growth visibility going forward. Only IT comes to mind.
If we ignore the pricing part, then there are 40-50 companies which would qualify. It is just that prices of those companies are not great. Of course IT will come fully out there, even some of the pharmaceutical companies will come there with 35-40% EBITDA margin. Those companies are very good and they are not like 80-90% ROE but 25-30% ROE businesses which is reasonably high with 25-30% growth. But they are available at about 80-90 PE. So there are a whole lot of companies which are high margin, low asset and have reasonable growth. The issue is to find them at a reasonable price.

What is your take on consumer staples? These have been trending at premium valuations. But there are big questions about urban recovery as well.
We are talking to the companies on the same lines.

Please do continue that thought.
The outlook looks to be pretty good at this juncture. Next year, I think the government will roll out a full recovery in the GST and their fiscal situation will be much better and hence with the 6.5% or 7% of fiscal deficit, we should start the new year with a bang.

The outlook right now looks very good for the year ahead in terms of business recovery. And in any case vaccines are there and rollout is happening very rapidly. My view is in the first half, bulk of the vaccination will be done in India also. It seems we are in a very good wicket and the stocks have done very well from March lows of last year. It is almost up 100% from the bottom. It may cool off somewhat here because it has been quite rapid. The real thing is coming from bond yield spikes in the US and the kind of uneasiness out there in the US markets. That may play some kind of consolidation game for some time but our own recovery, our own corporate earnings pick up will play out in the market itself.

Going forward, do you feel that the domestic action will be strong enough to insulate us from any global volatility because the bond markets have been playing havoc with sentiment?
It will not give us fill insulation. If the FIIs sell Rs 2,000-3,000 crore every day, clearly it will break the trend here. But that is about the market. As far as the individual stocks are concerned, I am quite sure that wherever there is a strong earnings momentum, that can override this particular correction and move forward because earnings have been depressed for a very long time. The companies which are coming back with the earnings momentum are pretty strong. I am quite sure wherever earnings momentum is there, it will take care of the market correction broadly.

And what is the sense that you are getting when it comes to the cement basket?
Within the infra theme, cement is a better bet because cement has more application than just the infra. The housing demand is also being held by that. Cement is a non-tradable commodity broadly globally. We have to make it in India. Even within India north, south, east, west kind of thing is there because it is a very logistic intensive industry unlike steel and which can be imported, Cement is a local play and hence the local demand-supply will play out well. And we have some wonderful cement companies in India. That is one of the plays for the infra or recovery.